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EX-31.2 - CERTIFICATION OF KEVIN S. BAUER, CHIEF FINANCIAL OFFICER - PERICOM SEMICONDUCTOR CORPexhibit31-2.htm
EX-32.1 - CERTIFICATION OF ALEX C. HUI, CHIEF EXECUTIVE OFFICER - PERICOM SEMICONDUCTOR CORPexhibit32-1.htm
EX-32.2 - CERTIFICATION OF KEVIN S. BAUER, CHIEF FINANCIAL OFFICER - PERICOM SEMICONDUCTOR CORPexhibit32-2.htm
EX-31.1 - CERTIFICATION OF ALEX C. HUI, CHIEF EXECUTIVE OFFICER - PERICOM SEMICONDUCTOR CORPexhibit31-1.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒     

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

              For the quarterly period ended September 26, 2015

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

              For the Transition Period from _______ to _______

              Commission File Number 0-27026

Pericom Semiconductor Corporation
(Exact Name of Registrant as Specified in Its Charter)

California 77-0254621
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1545 Barber Lane
Milpitas, California 95035
(408) 232-9100
(Address of Principal Executive Offices and
Issuer’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒       No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒       No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer   ☐ Accelerated Filer   ☒
     
Non-accelerated Filer   ☐ Smaller Reporting Company   ☐              

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act) Yes ☐       No ☒

As of October 26, 2015 the Registrant had outstanding 21,891,000 shares of Common Stock.



Pericom Semiconductor Corporation

Form 10-Q for the Quarter Ended September 26, 2015
INDEX

PART I. FINANCIAL INFORMATION       Page
Item 1: Condensed Consolidated Financial Statements (Unaudited)
 
            Condensed Consolidated Balance Sheets as of
September 26, 2015 and June 27, 2015 3
 
Condensed Consolidated Statements of Operations for the three months
  ended September 26, 2015 and September 27, 2014 4
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended September 26, 2015 and
September 27, 2014 5
 
Condensed Consolidated Statements of Cash Flows for the three months
ended September 26, 2015 and September 27, 2014 6
 
Notes to Condensed Consolidated Financial Statements 7
 
Item 2: Management’s Discussion and Analysis of
Financial Condition and Results of Operations 20
 
Item 3: Quantitative and Qualitative Disclosures about
Market Risk 27
 
Item 4: Controls and Procedures 28
 
PART II. OTHER INFORMATION
 
Item 1A:  Risk Factors 29
 
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 43
 
Item 6: Exhibits   44
 
Signatures 45

2



PART I. FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements

Pericom Semiconductor Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

September 26, June 27,
      2015       2015
ASSETS
Current assets:
       Cash and cash equivalents $ 41,544 $          38,773
       Investments in marketable securities 78,958 90,304
       Accounts receivable
              Trade (net of reserves and allowances of $1,631 and $1,830) 26,756 23,962
              Other receivables 2,727 2,377
       Inventories 15,183 13,613
       Prepaid expenses and other current assets 3,387 3,510
       Deferred income taxes 311 438
                     Total current assets 168,866 172,977
 
Property, plant and equipment – net 55,947 57,746
Investments in unconsolidated affiliates 2,289 2,311
Deferred income taxes – non-current 2,594 2,601
Intangible assets (net of accumulated amortization of $15,804 and $15,588) 3,234 4,057
Other assets 7,739 8,031
                     Total assets $ 240,669 $ 247,723
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
       Accounts payable $ 10,763 $ 8,960
       Accrued liabilities 10,142 11,425
                     Total current liabilities 20,905 20,385
 
Industrial development subsidy 5,010 5,377
Deferred income taxes 4,756 4,705
Noncurrent tax liabilities 1,424 1,411
Other long-term liabilities 426 236
                     Total liabilities 32,521 32,114
 
Commitments and contingencies (Note 6)
 
Shareholders’ equity:
       Common stock and paid in capital - no par value, 60,000,000 shares
              authorized; shares issued and outstanding: September 26, 2015,
              21,891,000; June 27, 2015, 22,177,000 109,455 114,248
       Retained earnings 94,574 92,346
       Accumulated other comprehensive income, net of tax 4,119 9,015
                     Total shareholders' equity 208,148 215,609
                     Total liabilities and shareholders' equity $ 240,669 $ 247,723

See notes to condensed consolidated financial statements.

3



Pericom Semiconductor Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

Three Months Ended
September 26, September 27,
      2015       2014
Net revenues $ 31,570 $ 33,259
Cost of revenues 17,229 19,179
       Gross profit 14,341 14,080
Operating expenses:
       Research and development 4,452 4,588
       Selling, general and administrative 9,066 7,300
              Total operating expenses 13,518 11,888
Income from operations 823 2,192
Interest and other income, net 3,245 1,274
Income before income tax expense 4,068 3,466
Income tax expense 535 1,010
Net income from consolidated companies 3,533 2,456
Equity in net income of unconsolidated affiliate 26 39
Net income $ 3,559 $ 2,495
Basic income per share $ 0.16 $ 0.11
Diluted income per share $ 0.16 $ 0.11
Shares used in computing basic income per share 21,955 21,936
Shares used in computing diluted income per share 22,523 22,262

See notes to condensed consolidated financial statements.

4



Pericom Semiconductor Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)

Three Months Ended
September 26, September 27,
      2015       2014
Net income $           3,559 $           2,495
Other comprehensive income (loss):
       Change in unrealized gain or loss on securities available for sale, net (148 ) (174 )
       Foreign currency translation adjustment (4,749 ) (458 )
       Tax benefit related to other comprehensive income (loss) 1 115
              Other comprehensive income (loss), net of tax (4,896 ) (517 )
Comprehensive income (loss) $ (1,337 ) $ 1,978

See notes to condensed consolidated financial statements.

5



Pericom Semiconductor Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 

Three Months Ended
September 26, September 27,
      2015       2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $           3,559 $           2,495
Adjustments to reconcile net income to net cash provided by operating activities:  
       Depreciation and amortization 2,297 2,260
       Share-based compensation 960 709
       Tax benefit resulting from share-based transactions 797 293
       Excess tax benefit resulting from share-based transactions (220 ) (29 )
       Write off of assets 66 301
       Loss on sale of investments 37 6
       Equity in net income of unconsolidated affiliate (26 ) (39 )
       Deferred taxes 441 50
       Changes in assets and liabilities:
              Accounts receivable (3,962 ) (1,033 )
              Inventories (2,103 ) 370
              Prepaid expenses and other current assets 77 1,400
              Other assets 13 11
              Accounts payable 2,651 371
              Accrued liabilities (1,701 ) (41 )
              Other long-term liabilities (3 ) -
                     Net cash provided by operating activities 2,883 7,124
 
CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of property, plant and equipment (2,032 ) (1,136 )
       Purchase of available-for-sale investments (10,214 ) (25,719 )
       Maturities and sales of available-for-sale investments 20,826 15,292
                     Net cash provided by (used in) investing activities 8,580 (11,563 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from common stock issuance under stock plans, net 6 1,498
       Cash dividends paid (1,331 ) -
       Excess tax benefit resulting from stock option transactions 220 29
       Repurchase of common stock (5,763 ) (2,302 )
                     Net cash used in financing activities (6,868 ) (775 )
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,824 ) (219 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,771 (5,433 )
CASH AND CASH EQUIVALENTS:
       Beginning of period 38,773 33,020
       End of period $ 41,544 $ 27,587

See notes to condensed consolidated financial statements.

6



Pericom Semiconductor Corporation
Notes To Condensed Consolidated Financial Statements
(Unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements have been prepared by Pericom Semiconductor Corporation (“Pericom” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of the Company’s financial position as of September 26, 2015, the results of operations for the three months ended September 26, 2015 and September 27, 2014 and cash flows for the three months ended September 26, 2015 and September 27, 2014. This unaudited quarterly information should be read in conjunction with the audited consolidated financial statements of Pericom and the notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on September 1, 2015.

The preparation of the interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the period. Actual amounts could differ from these estimates. The results of operations for the three months ended September 26, 2015 are not necessarily indicative of the results to be expected for the entire year. The three month periods ended September 26, 2015 and September 27, 2014 each had 13 weeks.

The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position or results of operations: advances and trends in new technologies; competitive pressures in the form of new products or price reductions on current products; changes in the overall demand for products offered by the Company; changes in customer relationships; acquisitions and the subsequent integration of the acquired entity with the Company; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risks associated with changes in domestic and international economic and/or political conditions or regulations and environmental laws; availability of necessary components; interruptions at wafer suppliers and subcontractors; fluctuations in currencies given the Company’s sales and operations being heavily weighted and paid in foreign currencies; and the Company’s ability to attract and retain employees necessary to support its growth.

These interim condensed consolidated financial statements include the accounts of Pericom Semiconductor Corporation and its wholly owned subsidiaries, Pericom Global Limited (“PGL”), PSE Technology Corporation (“PSE-TW”), and Pericom Asia Limited (“PAL”). PGL has two wholly-owned subsidiaries, Pericom International Limited (“PIL”) and Pericom Semiconductor (HK) Limited (“PHK”). In addition, PAL has three subsidiaries, PSE Technology (Shandong) Corporation ("PSE-SD") and Pericom Technology Yangzhou Corporation (“PSC-YZ”) for the Jinan, China and Yangzhou, China operations, respectively, and Pericom Technology Inc. (“PTI”). The Company eliminates all intercompany balances and transactions in consolidation.

PENDING TRANSACTION – On September 2, 2015, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Diodes Incorporated, a Delaware Corporation (“Diodes”) and PSI Merger Sub, Inc., a California corporation and a wholly-owned subsidiary of Diodes (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly-owned subsidiary of Diodes. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, excluding shares owned by shareholders who have exercised dissenters’ rights under California law and shares owned by the Company, Diodes, Merger Sub or any of their respective subsidiaries, will be converted into the right to receive $17.00 in cash, without interest. The transaction is subject to approval by the Company’s shareholders, as well as other customary closing conditions and regulatory approvals. 

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Concurrently with the Company’s execution of the Merger Agreement, certain directors and executive officers of the Company, in their capacities as holders of shares or other equity interests of the Company, entered into Voting Agreements with Diodes pursuant to which they agreed, among other things, to vote or cause to be voted all of the Company shares beneficially owned by such shareholders for the approval of the merger and the Merger Agreement and against any alternative proposal. Notwithstanding the foregoing, however, the Voting Agreements terminate upon the termination of the Merger Agreement in accordance with their terms, including the termination of the Merger Agreement by the Company’s Board of Directors in favor of a superior proposal.

The Company has agreed to customary restrictions on its ability to solicit and respond to any other proposals from third parties to acquire it and to provide information to, and enter into discussions or negotiations with, third parties regarding alternative acquisition proposals. However, prior to receiving shareholder approval, the solicitation restrictions are subject to a customary “fiduciary-out” provision that allows the Company to provide information to, and engage in negotiations or discussions with, third parties with respect to a written acquisition proposal if the board of directors of the Company determines in good faith after consultation with its outside legal counsel that the failure to take such action would reasonably be expected to be inconsistent with the Board of Directors’ fiduciary duties under applicable law.

The Merger Agreement contains certain termination rights for both the Company and Diodes, including the Company's ability to terminate the Merger Agreement in order to accept a superior proposal. In the event that the Merger Agreement is terminated, the Company may, under specified circumstances, be required to pay a termination fee of $15 million.

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on September 3, 2015. Additional information relating to the Merger Agreement is also included in that Current Report on Form 8-K, the Schedule 14A filed on September 17, 2015 and revised on October 13, 2015, the Current Report on Form 8-K filed on October 16, 2015 and in other filings the Company has made and will make with the SEC relating to the Merger Agreement.

FISCAL PERIOD – For purposes of reporting the financial results, the Company’s fiscal years end on the Saturday closest to the end of June. The year ended June 27, 2015 is referred to as fiscal year 2015 or fiscal 2015, whereas the current fiscal year 2016 or fiscal 2016 will end on July 2, 2016. Fiscal 2015 contains 52 weeks or 364 days, whereas fiscal 2016 will include a 53rd week to end the year on the Saturday closest to the end of June.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory. Under this ASU, inventory will be measured at the “lower of cost and net realizable value,” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2017, although public companies may early adopt for annual and interim reporting periods beginning after December 15, 2016. The impact on the Company’s financial condition, results of operations and cash flows as a result of the adoption of ASU 2014-09 has not yet been determined. 

8



2. INTANGIBLE ASSETS

The following table summarizes the components of intangible assets and related accumulated amortization balances for each of the period-ending dates shown, which were recorded as a result of business combinations:

September 26, 2015 June 27, 2015
Accumulated Accumulated
(in thousands)       Gross       Amortization       Net       Gross       Amortization       Net
Customer relationships $        5,845 $        (4,968 ) $        877 $        6,008 $        (4,862 ) $        1,146
Core developed technology 12,831 (10,836 ) 1,995 13,251 (10,726 ) 2,525
Total amortizable purchased intangible assets 18,676 (15,804 ) 2,872 19,259 (15,588 ) 3,671
 
SaRonix trade name 362 - 362 386   - 386
Total purchased intangible assets $ 19,038 $ (15,804 ) $ 3,234 $ 19,645 $ (15,588 ) $ 4,057

Amortization expense related to finite-lived purchased intangible assets was approximately $721,000 and $725,000 for the three month periods ended September 26, 2015 and September 27, 2014, respectively.

The Company performs an impairment review of its intangible assets at least annually. Based on the results of its most recent impairment review, the Company determined that no impairment of its intangible assets existed as of September 26, 2015. However, future impairment reviews could result in a charge to earnings.

The finite-lived purchased intangible assets consist of customer relationships and existing and core technology, which have remaining useful lives from one to two years. The Company expects future amortization expense associated with its intangible assets to be:

Months from September 26, 2015
(in thousands) Next 12 13-24 Over 24
      Months       Months       Months       Total
Customer relationships $         877 $ - $ - $        877
Core developed technology 1,744 251 - 1,995
Total $ 2,621 $ 251 $ - $ 2,872

3. INCOME PER SHARE

Basic income per share is based upon the weighted average number of common shares outstanding. Diluted income per share reflects the additional potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

9



Basic and diluted income per share for the three month periods ended September 26, 2015 and September 27, 2014 are computed as follows:

Three Months Ended
September 26, September 27,
(in thousands, except per share data) 2015 2014
Net income $ 3,559 $ 2,495
Computation of common shares outstanding – basic earnings per share:
       Weighted average shares of common stock 21,955 21,936
Basic earnings per share $ 0.16 $ 0.11
Computation of common shares outstanding – diluted earnings per share:
       Weighted average shares of common stock 21,955 21,936
       Dilutive shares using the treasury stock method 568 326
Shares used in computing diluted earnings per share 22,523 22,262
Diluted earnings per share $      0.16       $      0.11

Options to purchase 340,000 and 1,256,000 shares of common stock, and restricted stock units of 29,000 and zero were outstanding during the three month periods ended September 26, 2015 and September 27, 2014 respectively, but are not included in the computation of diluted earnings per share because the options and units would be anti-dilutive under the treasury stock method.

4. INVENTORIES

Inventories consist of:

September 26, June 27,
(in thousands) 2015 2015
Raw materials $ 7,448 $ 6,249
Work in process 3,150 2,812
Finished goods 4,585 4,552
Total inventories $      15,183       $            13,613

The Company considers raw material inventory obsolete and reserves for it if the raw material has not been placed into production within 365 days. The Company reviews its assembled devices for excess and records a reserve if the quantity of assembled devices in inventory is in excess of the greater of the quantity shipped in the previous twelve months, the quantity in backlog or the quantity forecasted to be shipped in the following twelve months. In certain circumstances, management will determine, based on expected usage or other factors, that inventory considered excess by these guidelines should not be reserved. The Company does occasionally determine that the last twelve months’ sales levels will not continue and reserves inventory in line with the quantity forecasted. As of September 26, 2015 and June 27, 2015, the Company had reserved for $2.4 million and $2.8 million of inventory, respectively.

5. ACCRUED LIABILITIES

Accrued liabilities consist of:

September 26, June 27,
(in thousands) 2015 2015
Accrued compensation $ 6,192       $ 6,489
Income taxes payable 2,207 2,280
Sales commissions 396 347
Other accrued expenses 1,347 2,309
Total accrued liabilities $      10,142 $            11,425

10



6. COMMITMENTS AND CONTINGENCIES

The Company’s future minimum commitments as of September 26, 2015 are as follows:

Months from September 26, 2015
(in thousands) Less than 12-24 24-36 Over 36 48-60 Over 60
12 Months Months Months Months Months Months Total
Operating lease payments $ 427 $ 315 $ 185 $ 8 $ 8 $ 2 $ 945
Capital equipment purchase commitments 11 - - - - - 11
Facility modification commitments 330 - - - - 330
Total      $        768       $        315       $        185       $        8       $        8       $        2       $        1,286

The operating lease commitments are primarily facility leases at certain of the Company’s Asian subsidiaries.

The facility modification commitments have been made at the Company’s Shandong, China manufacturing operation for a general contractor and architecture firm to develop feasibility studies, plans and cost estimates for potential additional development of the plant site. Building permits have been applied for, and site preparation has begun. The Company has no other purchase obligations beyond routine purchase orders and the facility modifications shown in the table as of September 26, 2015.

7. INDUSTRY AND SEGMENT INFORMATION

The Company has two operating segments which aggregate into one reportable segment, the interconnectivity device supply market. The Company designs, develops, manufactures and markets high performance integrated circuits and frequency control products.

The following table indicates the percentage of the Company’s net revenues and accounts receivable in excess of 10 percent with any single customer:

Net Revenues
Three Months Ended
September 26, September 27,
2015 2014
Customer A 19 % 12 %
Customer B 16 % 29 %
All others 65 % 59 %
                       100 %                        100 %
 
Accounts Receivable
September 26, June 27,
2015 2015
Customer A 27 % 23 %
Customer B 14 % 16 %
All others 59 % 61 %
100 % 100 %

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For geographical reporting, the Company attributes net revenues to the country where customers are located (the “bill to” location). The Company neither conducts business in nor sells to persons in Iran, Syria or Sudan, countries located in referenced regions identified as state sponsors of terrorism by the U.S. Department of State and subject to U.S. economic sanctions and export controls. The following table sets forth net revenues by country for the three month periods ended September 26, 2015 and September 27, 2014:

Net Revenues
Three Months Ended
September 26, September 27,
  2015 2014
China (including Hong Kong) $ 14,847 $ 16,178
Taiwan 11,297 10,805
United States 1,078 1,462
Other (less than 10% each) 4,348 4,814
Total net revenues       $      31,570       $      33,259

Long-lived assets consist of all non-monetary assets, excluding financial assets, deferred taxes and intangible assets. The Company attributes long-lived assets to the country where they are located. The following table sets forth the Company’s long-lived assets by country of location as of September 26, 2015 and June 27, 2015:

September 26, June 27,
2015 2015
China (including Hong Kong) $ 29,866 $ 31,211
United States 14,178 14,392
Taiwan 10,349 10,974
Korea 1,349 1,024
Others (less than 10% each) 205 145
Total long-lived assets       $      55,947       $               57,746

8. STOCK REPURCHASE PROGRAM

On April 24, 2014, the Board of Directors authorized a share repurchase program for $20 million of common stock. The Company may repurchase the shares from time to time in open market or private transactions, at the discretion of the Company’s management.

During the three month period ended September 26, 2015, the Company repurchased 464,957 shares for an aggregate cost of approximately $5.8 million. During the three month period ended September 27, 2014, the Company repurchased 250,547 shares for an aggregate cost of approximately $2.3 million. Current cash balances and the proceeds from stock option exercises and purchases in the employee stock purchase plan have funded stock repurchases in the past. As of September 26, 2015, the Company had approximately $10.0 million of repurchase authority remaining under the 2014 share repurchase program. Due to the pending acquisition of the Company, no future share repurchases are scheduled.

9. SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

PREFERRED STOCK

The Company’s shareholders have authorized the Board of Directors to issue 5,000,000 shares of currently undesignated preferred stock from time to time in one or more series and to fix the rights, privileges and restrictions of each series. As of September 26, 2015, the Company has issued no shares of preferred stock.

STOCK OPTION PLANS

As of September 26, 2015 the Company had three stock incentive plans and one employee stock purchase plan, including the 2001 Stock Option Plan, 2004 Stock Incentive Plan, 2014 Stock Award and Incentive Compensation Plan (collectively, the “Plans”) and the 2010 Employee Stock Purchase Plan (“ESPP”).

Under the Plans, the Company has reserved an aggregate of 6.2 million shares of common stock as of September 26, 2015 for issuance to employees, officers, directors, independent contractors and consultants of the Company in the form of incentive or nonqualified stock options, or grants of restricted or performance stock units.

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The Company may grant stock options at the fair value on the grant date for incentive stock options and nonqualified stock options. Options vest over periods of generally 48 months as determined by the Board of Directors. Options granted under the Plans expire 10 years from the grant date.

The Company estimates the fair value of each employee stock option on the date of grant using the Black-Scholes option valuation model and expenses that value as compensation using a straight-line method over the option’s vesting period, which corresponds to the requisite employee service period. The Company estimates expected stock price volatility based on actual historical volatility for periods that the Company believes represent predictors of future volatility. The Company uses historical data to estimate option exercises, expected option holding periods and option forfeitures. The Company bases the risk-free interest rate for periods within the contractual life of the option on the U.S. Treasury yield corresponding to the expected life of the underlying option.

The Company’s did not grant any stock options under its Plans during the three month periods ended September 26, 2015 or September 27, 2014.

The following table summarizes the Company’s stock option activity for the three months ended September 26, 2015:

Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Shares Exercise Term Value
(in thousands) Price (years) (in thousand)
Options outstanding as of June 27, 2015 1,249 $ 10.92 4.67 $ 4,501
 
Granted - -
Exercised (14 ) 11.19
Cancelled or expired - -
Options outstanding as of September 26, 2015 1,235 $ 10.92 4.44 $ 7,872
 
Options vested and expected to vest as of September 26, 2015 1,222 $ 10.95 4.40 $ 7,759
Options exercisable as of September 26, 2015                      1,050       $        11.29       3.76       $        6,302

As of September 26, 2015, 2.9 million shares were available for future grants under the incentive plans. The aggregate intrinsic value of options exercised during the three months ended September 26, 2015 was $78,000.

As of September 26, 2015, expected future compensation expense relating to options outstanding is $626,000, which will be amortized to expense over a weighted average period of 2.0 years.

13



Additional information regarding options outstanding and exercisable as of September 26, 2015 is as follows:

Options Outstanding Exercisable Options
Weighted
Number Average Weighted Number Weighted
Outstanding as Remaining Average Exercisable as Average
Range of Exercise of September Contractual Exercise of September Exercise
Prices 26, 2015 Term Price 26, 2015 Price
$ 5.48       $ 8.10       249,000       6.77       $ 7.65       158,000       $ 7.62
8.11 8.85 261,000 4.50 8.56   231,000   8.54
8.86 10.25 254,000 4.84 9.83 211,000 9.96
10.26 15.45 305,000 3.39     13.56 284,000 13.61
15.46 18.10 166,000 2.14   16.36 166,000     16.36
$      5.48 $      18.10        1,235,000 4.44 $      10.92        1,050,000 $      11.29

Restricted Stock Units and Performance Stock Units

Restricted stock units (“RSUs”) and performance stock units (“PSUs”) are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs and PSUs is subject to the employee’s continuing service to the Company. RSUs generally vest over a period of 4 years and are expensed ratably on a straight-line basis over their respective vesting period net of estimated forfeitures. PSUs are granted to executives of the Company and will vest in approximately 12 months subject to the achievement of certain financial metrics of the Company as well as each participant’s performance goals established at the beginning of the fiscal year. The fair value of RSUs and PSUs granted pursuant to the Company’s 2014 Stock Incentive Plan is the product of the number of shares granted and the grant date fair value of the common stock. A summary of activity of RSUs and PSUs for the three months ended September 26, 2015 is presented below:

 

Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Award Contractual Value
Shares Date Fair Term (in
(in thousands) Value (years) thousands)
RSUs and PSUs outstanding as of June 27, 2015       769       $ 9.76       1.33       $ 10,792
 
Awarded 334 14.64
Released   (174 ) 9.17
Forfeited   (3 ) 10.66
RSUs and PSUs outstanding as of September 26, 2015 926 $ 11.63 1.54 $ 15,990
  
RSUs and PSUs expected to vest after September 26, 2015                     790 $        11.41        1.40 $        13,653
 

Of the 334,000 shares awarded during the three months ended September 26, 2015, 235,000 shares were RSUs while the remaining shares awarded were PSUs. As of September 26, 2015, expected future compensation expense relating to RSUs and PSUs is $7.2 million, which will be amortized to expense over a weighted average remaining recognition period of 2.6 years.

2010 EMPLOYEE STOCK PURCHASE PLAN

The Company’s ESPP allows eligible employees of the Company to purchase shares of common stock through payroll deductions. The Company reserved 2.0 million shares of the Company’s common stock for issuance under this Plan, of which 1.5 million remain available at September 26, 2015. The ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during six-month purchase periods. The six-month periods come to an end on or about May 1 and November 1 and the purchases are then made. Thus there were no purchases under the ESPP for the three month periods ended September 26, 2015 and September 27, 2014. Participants in the ESPP may purchase stock at 85% of the lower of the stock’s fair market value on the first day and last day of the offering period. The maximum number of shares of Common Stock that any employee may purchase during any offering period under the plan is 1,500 shares, and an employee may not accrue more than $15,000 for share purchases in any offering period.

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The Company estimates the fair value of stock purchase rights granted under the Company’s ESPP on the date of grant using the Black-Scholes option valuation model. Accounting Standards Codification (“ASC“) Topic 718, Compensation – Stock Compensation, states that a “lookback” pricing provision with a share limit should be considered a combination of stock and a call option. The valuation results for these elements have been combined to value the specific features of the stock purchase rights. The Company bases volatility on the expected volatility of the Company’s stock during the offering period. The expected term is determined by the time from enrollment until purchase, and the Company uses the U.S. Treasury yield for the risk-free interest rate for the offering period.

At September 26, 2015, the Company had $19,000 in unamortized share-based compensation related to its ESPP which will be amortized and recognized in the consolidated statement of operations over the next month.

SHARE-BASED COMPENSATION

The following table shows total share-based compensation expense classified by Consolidated Statements of Operations reporting caption for the three month periods ended September 26, 2015 and September 27, 2014 generated from the plans described above:

Three Months Ended
September 26, September 27,
(in thousands)       2015       2014
Cost of goods sold $ 63 $ 33
Research and development 287 218
Selling, general and administrative 610 458
Pre-tax share-based compensation expense 960 709
Income tax impact 321 230
Net share-based compensation expense $      639 $      479

The amount of share-based compensation expense capitalized in inventory as of September 26, 2015 and June 27, 2015 is immaterial.

10. INCOME TAXES

Income Tax Expense

Income tax expense for the three month periods ended September 26, 2015 and September 27, 2014 was $535,000 and $1.0 million, respectively, and was comprised of domestic federal and state income tax and foreign income tax. The effective tax rate for the three months ended September 26, 2015 was 13%, which resulted from the allocation of earnings between different tax jurisdictions and the inability to utilize losses in certain non-includable entities. The effective tax rate for the three months ended September 27, 2014 was 29%. As of September 26, 2015 and June 27, 2015, the Company has recorded a valuation allowance of $4.4 million against its deferred tax assets.

The Company’s effective tax rate may differ from the federal statutory rate primarily due to the permanent differences related to the benefit of foreign rate differentials, income inclusions under Subpart F tax rules, and non-deductible share-based compensation from equity grants.

Accounting for Uncertainty in Income Taxes

The Company’s total amount of unrecognized tax benefits as of September 26, 2015 was $2.3 million. Of this amount, $1.1 million would affect the Company’s effective tax rate if recognized. In addition, as of September 26, 2015 the Company had accrued $240,000 for any interest and penalties related to unrecognized tax benefits.

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The Company is subject to examination by federal, foreign, and various state jurisdictions for the years 2009 through 2015.

11. INVESTMENT IN UNCONSOLIDATED AFFILIATE

The Company’s investment in an unconsolidated affiliate is as follows:

September 26, June 27,
(in thousands) 2015 2015
Jiyuan Crystal Photoelectric Frequency Technology Ltd.       $        2,289       $               2,311

PSE-TW has a 49% equity interest in Jiyuan Crystal Photoelectric Frequency Technology Ltd. (“JCP”), an FCP manufacturing company located in Science Park of Jiyuan City, Henan Province, China. JCP is a key manufacturing partner of PSE-TW and supplies PSE-TW with blanks for its surface mount device (“SMD”) production lines. For the first three months of fiscal 2016 and 2015, the Company’s allocated portion of JCP’s results was income of $26,000 and $39,000, respectively.

12. EQUITY AND COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income, changes in net unrealized gains or losses on available-for-sale investments and changes in cumulative currency translation adjustments at consolidated subsidiaries.

As of September 26, 2015, accumulated other comprehensive income of $4.1 million consists of $4.2 million of accumulated currency translation gains and $127,000 of net unrealized losses on available-for-sale investments, which was recorded net of a $2,000 tax benefit. As of June 27, 2015, accumulated other comprehensive income of $9.0 million was made up of $9.0 million of accumulated currency translation gains and $21,000 of net unrealized gains on available-for-sale investments, which was recorded net of a $2,000 tax benefit.

13. DIVIDENDS

On July 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock. The aggregate payment of approximately $1.3 million was made on September 3, 2015 to shareholders of record as of August 20, 2015.

14. SHORT-TERM DEBT

As of September 26, 2015 and June 27, 2015, the Company has no outstanding debt. However, the Company’s subsidiary PSE-TW has three loan and credit facilities in place for equipment purchases or inventory financing via short term loans, letters of credit, and trade financing. The first is an unsecured facility for $100 million New Taiwan Dollars (“NTD”), or approximately U.S. $3.0 million. Loans under this facility are limited to $70 million NTD (U.S. $2.1 million), are for up to 180 days, and are based on the Taiwan Interbank Offered Rate (“TAIBOR”) plus 1.25% and may be in NTD, USD, Japanese yen (“JPY”) or other currencies. The second is an unsecured facility for $80 million NTD (U.S. $2.4 million). Loans under this facility are limited to $60 million NTD (U.S. $1.8 million), are for up to 180 days, with the interest rate determined on a case by case basis, and may be in NTD, USD, or JPY. The third is a secured facility for up to either $200 million NTD or $6.0 million USD. The loans are for up to 180 days, and may be in NTD, USD, JPY or other currencies, with the interest rate based on a spread over various benchmark rates depending upon the currency. PSE-TW has pledged $4.0 million in land and buildings as collateral for the secured loan and credit facility.

15. INDUSTRIAL DEVELOPMENT SUBSIDY

As of September 26, 2015, industrial development subsidies in the amount of $11.6 million have been earned and applied for by PSE-SD from the Jinan Hi-Tech Industries Development Zone Commission based on meeting certain pre-defined criteria. The subsidies may be used for the acquisition of assets or to cover business expenses. When a subsidy is used to acquire assets, the subsidy will be amortized over the useful life of the asset. When a subsidy is used for expenses incurred, the subsidy is regarded as earned upon the incurrence of the expenditure. The remaining balance of the subsidies as of September 26, 2015 was $5.0 million, which is expected to be recognized over the next five to seven years. 

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The Company recognized $186,000 and $188,000 of industrial development subsidy as a reduction of cost of goods sold and $42,000 and $47,000 of industrial development subsidy as a reduction of operating expenses in the consolidated statements of operations for the three month periods ended September 26, 2015 and September 27, 2014, respectively.

16. INVESTMENTS IN MARKETABLE SECURITIES

The Company’s policy is to invest in instruments with investment grade credit ratings. The Company classifies its short-term investments as “available-for-sale” securities and the Company bases the cost of securities sold using the specific identification method. The Company accounts for unrealized gains and losses on its available-for-sale securities as a separate component of shareholders’ equity in the consolidated balance sheets in the period in which the unrealized gain or loss occurs. As of September 26, 2015, a summary of investments by major security type is as follows:

As of September 26, 2015
Net
Unrealized
Amortized Unrealized Unrealized Gains
(in thousands) Cost Gains Losses (Losses) Fair Value
Available-for-Sale Securities
       Time deposits $ 19,264 $ - $ - $ - $ 19,264
       Repurchase agreements - - - - -
       National government and agency securities 3,180 61 - 61 3,241
       State and municipal bond obligations 5,201 50 (9 ) 41 5,242
       Corporate bonds and notes 39,386 76 (274 ) (198 ) 39,188
       Asset backed securities 7,634 12 (27 ) (15 ) 7,619
       Mortgage backed securities 4,419 2 (17 ) (15 ) 4,404
Total       $        79,084       $        201       $            (327 )       $            (126 )       $        78,958
 
As of June 27, 2015 a summary of investments by major security type is as follows:
 
As of June 27, 2015
Net
Unrealized
Amortized Unrealized Unrealized Gains
(in thousands) Cost Gains Losses (Losses) Fair Value
Available-for-Sale Securities
       Time deposits $ 22,157 $ - $ - $ - $ 22,157
       National government and agency securities 4,612 64 (3 ) 61 4,673
       State and municipal bond obligations 4,488 13 (11 ) 2 4,490
       Corporate bonds and notes 46,889 168 (200 ) (32 ) 46,857
       Asset backed securities 6,994 12 (20 ) (8 ) 6,986
       Mortgage backed securities 5,143 11 (13 ) (2 ) 5,141
Total $ 90,283 $ 268 $ (247 ) $ 21 $ 90,304

The above investments are included in short-term investments in marketable securities on the Company’s condensed consolidated balance sheets.

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The following tables show the unrealized losses and fair market values of the Company’s investments that have unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 26, 2015 and June 27, 2015:

Continuous Unrealized Losses at September 26, 2015
Less Than 12 Months 12 Months or Longer Total
Unrealized Unrealized Unrealized
(in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
National government and agency securities $ - $ - $ - $ - $ - $ -
State and municipal bond obligations 593 6 607 3 1,200 9
Corporate bonds and notes 18,266 239 1,758 35 20,024 274
Asset backed securities 2,404 12 424 15 2,828 27
Mortgage backed securities 3,200 17 - - 3,200 17
Total $ 24,463 $ 274 $ 2,789 $ 53 $ 27,252 $ 327
 
Continuous Unrealized Losses at June 27, 2015
Less Than 12 Months 12 Months or Longer Total
Unrealized Unrealized Unrealized
(in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
National government and agency securities $ 1,411 $ 3 $ 190 $ - $ 1,601 $ 3
State and municipal bond obligations 928 4 1,077 7 2,005 11
Corporate bonds and notes 20,621 188 2,893 12 23,514 200
Asset backed securities 1,961 16 1,061 4 3,022 20
Mortgage backed securities 2,023 12 336 1 2,359 13
      $      26,944       $      223       $      5,557       $      24       $      32,501       $      247

The unrealized losses are of a temporary nature due to the Company’s intent and ability to hold the investments until maturity or until the cost is recoverable. The unrealized losses are primarily due to fluctuations in market interest rates. The Company reports unrealized gains and losses on its “available-for-sale” securities in accumulated other comprehensive income in shareholders’ equity.

The Company records gains or losses realized on sales of available-for-sale securities in interest and other income, net on its condensed consolidated statements of operations. The cost of securities sold is based on the specific identification of the security and its amortized cost. For the three month periods ended September 26, 2015 and September 27, 2014, proceeds from sales and maturities of available-for-sale securities were $20.8 million and $15.3 million, respectively, and realized losses were $37,000 and $6,000, respectively.

The following table lists the fair market value of the Company’s short-term investments by length of time to maturity as of September 26, 2015. Securities with maturities over multiple dates are mortgage-backed (“MBS”) or asset-backed securities (“ABS”) featuring periodic principle paydowns through 2042.

September 26,
(in thousands) 2015
Contractual Maturities
Less than 12 months $ 21,985
One to three years 35,128
Over three years 16,699
Multiple dates 5,146
Total $      78,958

17. FAIR VALUE MEASUREMENTS

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for financial assets measured at fair value on a recurring basis. All of the investments are classified as Level 2 as of September 26, 2015. Level 2 pricing is provided by third party sources of market information obtained through the Company’s investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities it holds are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities.

The Company’s Level 2 securities include time deposits, government securities, corporate debt securities and mortgage-backed and asset-backed securities. The securities must meet a required rating level by at least one of the rating agencies (Moody’s, Standard & Poor’s, Fitch). Government securities include US federal agency securities, foreign government and agency securities, and US state and municipal bond obligations. Many of the municipal bonds are insured; those that are not are nearly all AAA/Aaa rated. The corporate debt securities are all investment grade and most are single A-rated or better. The asset-backed securities are AAA/Aaa rated and are backed by auto loans, student loans, credit card balances and residential or commercial mortgages.

As of September 26, 2015
(in thousands) Fair Value Level 1 Level 2 Level 3
Investments
       Time deposits $ 40,062 $ - $ 40,062 $ -
       Repurchase Agreements 754 - 754 -
       National government and agency securities 3,241 - 3,241 -
       State and municipal bond obligations 5,242 - 5,242 -
       Corporate bonds and notes 39,188 - 39,188 -
       Asset backed securities 7,619 - 7,619 -
       Mortgage backed securities 4,404 - 4,404 -
       Total       $       100,510       $       -       $       100,510       $       -

        (1)        $20,798,000 of the time deposits and $754,000 of the repurchase agreements are included in cash and cash equivalents; the balance of the investments are included in short-term investments in marketable securities on our consolidated balance sheet.

The Company had no transfers into or out of Level 2 during the three months ended September 26, 2015.

When assessing marketable securities for other-than-temporary declines in value, a number of factors are considered. Analyses of the severity and duration of price declines, remaining years to maturity, portfolio manager reports, economic forecasts, and the specific circumstances of issuers indicate that it is reasonable to expect marketable securities with unrealized losses as of September 26, 2015 to recover in fair value up to the Company’s cost bases within a reasonable period of time. The Company does not intend to sell investments with unrealized losses before maturity, when the obligors are required to redeem them at full face value or par. The Company believes the obligors have the financial resources to redeem the debt securities. Accordingly, the Company does not consider the investments to be other-than-temporarily impaired as of September 26, 2015.

The Company has determined that the amounts reported for cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities approximate fair value because of their short maturities and/or variable interest rates.

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Item 2: Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Pericom Semiconductor Corporation

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1 - Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 27, 2015 (the “Form 10-K”).

Factors That May Affect Operating Results

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any statements regarding our sales to Taiwan and China, the continuation of a high level of turns orders, higher or lower levels of inventory, future gross profit and gross margin; the plans and objectives of management for future operations; our tax rate; currency fluctuations; the adequacy of allowances for returns, price protection and other concessions; the sufficiency of cash generated from operations and cash balances; our exposure to interest rate risk; expectations regarding our research and development and selling, general and administrative expenses; and our possible future acquisitions and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth (i) in Item 1A, Risk Factors, of Part II of this Form 10-Q, and (ii) in Note 1 to the Notes to Condensed Consolidated Financial Statements. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.

Executive Overview

Pericom Semiconductor Corporation (the “Company” or “Pericom” or “we”, “us” or “our”) was incorporated in June 1990 in the state of California. We design, develop and market high-performance integrated circuits (“ICs”) and frequency control products (“FCPs”) used in many of today's advanced electronic systems. Our analog, digital and mixed-signal ICs, together with our FCP products enable higher system bandwidth and signal quality, resulting in better operating reliability, signal integrity, and lower overall system cost in applications such as notebook computers, servers, network switches and routers, storage area networks, digital TVs, cell phones, GPS and digital media players.

A few years ago, we embarked on a strategy to transform our business, as sales of our products used in personal computers and laptops declined with the transition to mobile devices such as tablets and smart phones where we had lower market shares. Our strategy was to increase sales from those market segments offering higher gross margins and growth potential, such as the ultramobility and embedded markets, including automotive.

On September 3, 2015, we announced that we had entered into an Agreement and Plan of Merger with Diodes Incorporated summarized in Note 1 of Notes to Condensed Consolidated Financial Statements.

During the three months ended September 26, 2015, net revenues decreased 5.1% as compared with the three months ended September 27, 2014, with reduced sales in the embedded, digital media, storage and networking end market segments, partially offset by sales gains in the PC/notebook market segment, where our new products have higher gross margins than in years past. We increased gross profit for the three months ended September 26, 2015 to $14.3 million for an increase of $261,000 from $14.1 million for the three months ended September 27, 2014, primarily due to improved gross margins in both IC and FCP products. The overall gross margin for the three months ended September 26, 2015 was 45.4%, a 310 basis point improvement, as compared to 42.3% for the three months ended September 27, 2014.

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Operating income was $823,000 for the three months ended September 26, 2015, as compared with operating income of $2.2 million for the three months ended September 27, 2014, with the decrease attributable to $1.7 million of merger-related expenses incurred in the current period. Interest and other income was $3.2 million for the three months ended September 26, 2015, as compared with interest and other income of $1.3 million for the three months ended September 27, 2014, with the increase attributable primarily to a $1.2 million increase in unrealized exchange gains and $805,000 of other income from a release of reserves related to a foreign subsidy. Net income for the three months ended September 26, 2015 was $3.6 million, or $0.16 per diluted share as compared to a net income of $2.5 million or $0.11 per share for the three months ended September 27, 2014.

Results of Operations

The following table sets forth certain statement of operations data as a percentage of net revenues for the periods indicated.

Three Months Ended
September 26,       September 27,
2015 2014
       Net revenues 100.0 % 100.0 %
       Cost of revenues 54.6 % 57.7 %
              Gross profit 45.4 % 42.3 %
       Operating expenses:
              Research and development 14.1 % 13.8 %
              Selling, general and administrative 28.7 % 21.9 %
                     Total 42.8 % 35.7 %
       Income from operations 2.6 % 6.6 %
       Interest and other income, net 10.3 % 3.8 %
       Income before income taxes 12.9 % 10.4 %
       Income tax expense 1.7 % 3.1 %
       Net income from consolidated companies 11.2 % 7.3 %
       Equity in net income of unconsolidated affiliates 0.1 % 0.1 %
       Net income 11.3 % 7.4 %

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Net Revenues

The following table sets forth our revenues and the customer concentrations with respect to such revenues for the periods indicated.

Three Months Ended
      September 26,       September 27,       %
(in thousands) 2015 2014 Change
Net revenues $      31,570 $      33,259 -5.1 %
% of net revenues accounted for by top 5 direct
customers (1) 52.0 % 52.0 %
 
Number of direct customers that each account for
more than 10% of net revenues 2 2
 
% of net revenues accounted for by top 5 end
customers (2) 38.5 % 29.9 %
 
Number of end customers that each account for
more than 10% of net revenues 2 -

(1)        Direct customers purchase products directly from us and include distributors, contract manufacturers and original equipment manufacturers (“OEMs”).
 
(2) End customers are OEMs and their products are manufactured using our products. End customers may purchase directly from us or from distributors or contract manufacturers. For end customer data, we rely on information provided by our direct distribution and contract manufacturing customers.

Net revenues consist of product sales, which we generally recognize upon shipment, less an estimate for returns and allowances.

Net revenues decreased $1.7 million or 5.1% in the first three months of fiscal 2016 versus the first three months of fiscal 2015. Net revenue for IC and FCP products in the first three months of fiscal 2016 versus the first three months of fiscal 2015 reflected:

an increase of $298,000 or 1.5% in sales of IC products to $20.4 million, and 
a decrease of $2.0 million or 15.1% in sales of our FCP products to $11.1 million.

The increase in sales of IC products was primarily driven by increased sales in the PC/notebook end market segment. The decrease in sales of FCP products occurred primarily in the digital media, embedded and storage end market segments.

The following table sets forth net revenues by country as a percentage of total net revenues for the three months ended September 26, 2015 and September 27, 2014:

Three Months Ended
September 26,       September 27,
2015 2014
China (including Hong Kong) 47 % 49 %
Taiwan 36 % 32 %
United States 3 % 4 %
Other (less than 10% each) 14 % 15 %
Total 100 % 100 %

Over the past several years, sales to China and Taiwan have constituted the majority of our sales. We expect this trend will continue in the future.

Our net revenue levels have been highly dependent on the number of new orders that are received for products to be delivered to the customer within the same quarter, also called “turns” orders. Because of our lack of visibility into demand when turns orders are high, it is difficult to predict which products to build to match future demand. We believe the current high level of turns orders will continue indefinitely. The sustainability of customer demand is uncertain and our markets are highly dependent on worldwide economic conditions. The high level of turns orders together with the uncertainty of product mix and pricing makes it difficult to predict future levels of sales and may require us to carry higher levels of inventory.

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Gross Profit

The following table sets forth our gross profit for the periods indicated:

Three Months Ended
          September 26,         September 27,         %
(in thousands) 2015 2014 Change
       Net revenues $      31,570 $      33,259 -5.1 %
       Gross profit 14,341 14,080 1.9 %
       Gross profit as a percentage of net
       revenues (gross margin) 45.4 % 42.3 %

The increase in gross profit in the first three months of fiscal 2016 as compared to the first three months of fiscal 2015 of $261,000 is the result of:

a gross margin increase from 42.3% to 45.4%, resulting in a $1.0 million improvement in gross profit, and  
a 5.1% decrease in sales, which led to $767,000 of reduced gross profit.

The sales decrease was discussed above. The gross margin increase resulted primarily from our initiatives to focus on higher-margin opportunities in server, storage, networking, telecom and embedded market segments, as well as increased sales mix of crystal oscillator products and recently higher margin products in the PC/notebook end market.

Future gross profit and gross margin are highly dependent on the level and product mix of net revenues. This includes the mix of sales between lower margin FCP products and our higher margin IC products. Although we have been successful at favorably improving our integrated circuit product mix and penetrating new end markets, there can be no assurance that this will continue. Accordingly, we are not able to predict future gross profit levels or gross margins with certainty.

During the three month periods ended September 26, 2015 and September 27, 2014, gross profit and gross margin benefited as a result of the sale of inventory of $29,000 and $88,000 respectively, that we had previously identified as excess and written down to zero value.

Research and Development (“R&D”)

Three Months Ended
September 26, September 27, %
(in thousands)         2015         2014         Change
Net revenues $      31,570 $      33,259      -5.1 %
Research and development 4,452 4,588 -3.0 %
 
R&D as a percentage of net revenues 14.1 % 13.8 %

Research and development expenses consist primarily of costs related to personnel and overhead, non-recurring engineering charges, and other costs associated with the design, prototyping, testing, manufacturing process design support, and technical customer applications support of our products. The expense decrease of $136,000 for the three month period ended September 26, 2015 as compared to the same period of the prior year included decreases of $276,000 for masks and $148,000 for outside services, partially offset by increased expenses of $152,000 for software maintenance and $121,000 for depreciation.

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We believe that continued spending on research and development to develop new products and improve manufacturing processes is critical to our long-term success, and as a result we expect to continue to invest in research and development projects. In the short term, we intend to continue to focus on cost control as business conditions improve. If business conditions deteriorate or the rate of improvement does not meet our expectations, we may implement further cost-cutting actions.

Selling, General and Administrative (“SG&A”)

Three Months Ended
September 26, September 27, %
(in thousands)         2015         2014         Change
Net revenues $      31,570 $      33,259 -5.1 %
Selling, general and administrative 9,066 7,300 24.2 %
 
SG&A as a percentage of net revenues 28.7 % 21.9 %

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The expense increase of approximately $1.8 million for the three month period ended September 26, 2015 as compared to the same period of the prior year is attributable primarily to the incurrence of $1.7 million in legal services, financial advisor and shareholder relations related to the proposed merger, $152,000 for share-based compensation and $58,000 for software maintenance.

We anticipate that selling, general and administrative expenses will increase modestly in future periods over the long term due to increased commission expense to the extent we achieve higher sales levels. We intend to continue our focus on controlling costs. If business conditions deteriorate or the rate of improvement does not meet our expectations, we may implement further cost-cutting actions.

Interest and Other Income, Net

Three Months Ended
September 26,         September 27, %
(in thousands)         2015 2014         Change
Interest income $      618 $      647 -4.5 %
Other income 798 44 1713.6 %
Foreign exchange transaction gain 1,829 583 213.7 %
       Interest and other income, net $ 3,245 $ 1,274 154.7 %

Interest and other income for the three month period ended September 26, 2015 increased $2.0 million as compared with the same period of the prior year due primarily to a $1.2 million increase in foreign exchange transaction gains and $805,000 of other income from a release of reserves held for a government subsidy grant to our Yangzhou facility.

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Income Tax Expense

Three Months Ended
September 26, September 27, %
(in thousands)         2015         2014         Change
Pre-tax income $       4,068 $       3,466 17.4 %
Income tax expense 535 1,010 -47.0 %
 
Effective tax rate 13.2 % 29.1 %

The difference in the effective tax rate for the three months ended September 26, 2015 as compared with the same period of the prior year is due primarily to the allocation of earnings between different tax jurisdictions and the inability to utilize losses in certain non-includable entities.

Our effective tax rate differs from the federal statutory rate primarily due to state income taxes, the effect of foreign income tax and foreign losses and stock-based compensation from equity grants.

Equity in Net Income of Unconsolidated Affiliate

Equity in net income of unconsolidated affiliate consists of our allocated portion of the net income of Jiyuan Crystal Photoelectric Frequency Technology Ltd. (“JCP”), an FCP manufacturing company located in Science Park of Jiyuan City, Henan Province, China. JCP is a key manufacturing partner of PSE-TW, and PSE-TW has acquired a 49% equity interest in JCP. For the three month periods ended September 26, 2015 and September 27, 2014, the Company’s allocated portion of JCP’s results was income of $26,000 and $39,000, respectively.

Liquidity and Capital Resources

As of September 26, 2015, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $120.5 million as compared with $129.1 million on June 27, 2015.

Our investment in debt securities includes government securities, corporate debt securities and mortgage-backed and asset-backed securities. Government securities include US treasury securities, US federal agency securities, foreign government and agency securities, and US state and municipal bond obligations. Many of the municipal bonds are insured; those that are not are nearly all AAA/Aaa rated. The corporate debt securities are all investment grade and nearly all are single A-rated or better. The asset-backed securities are AAA/Aaa rated and are backed by auto loans, student loans, credit card balances and residential or commercial mortgages. Most of our mortgage-backed securities are collateralized by prime residential mortgages issued by government agencies including FNMA, FHLMC and FHLB. Those issued by banks are AAA-rated. As of September 26, 2015, unrealized gains on marketable securities net of taxes were $125,000. When assessing marketable securities for other than temporary declines in value, we consider a number of factors. Our analyses of the severity and duration of price declines, portfolio manager reports, economic forecasts and the specific circumstances of issuers indicate that it is reasonable to expect marketable securities with unrealized losses as of September 26, 2015 to recover in fair value up to our cost bases within a reasonable period of time. We have the ability and intent to hold investments with unrealized losses until maturity, when the obligors are required to redeem them at full face value or par, and we believe the obligors have the financial resources to redeem the debt securities. Accordingly, we do not consider our investments to be other than temporarily impaired as of September 26, 2015.

As of September 26, 2015, $41.5 million was classified as cash and cash equivalents compared with $38.8 million as of June 27, 2015. The maturities of our short term investments are staggered throughout the year so that cash requirements are met. Because we are a fabless semiconductor manufacturer, we have lower capital equipment requirements than other semiconductor manufacturers who own wafer fabrication facilities. For the three month period ended September 26, 2015, we spent approximately $2.0 million on property, plant and equipment, compared to $1.1 million for the three month period ended September 27, 2014. We generated approximately $618,000 of interest income for the three month period ended September 26, 2015, as compared with $647,000 of interest income for the three month period ended September 27, 2014. In the longer term we may generate less interest income if our total invested balance decreases and these decreases are not offset by rising interest rates or increased cash generated from operations or other sources.

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Our net cash provided by operating activities of $2.9 million for the three months ended September 26, 2015 was primarily the result of $3.6 million of net income and the addition of non-cash expenses of $2.3 million in depreciation and amortization, $960,000 of share-based compensation expense, $797,000 of tax benefit from share-based transactions, $441,000 from deferred taxes and $66,000 from the write off of assets, partially offset by deductions of $220,000 of excess tax benefit from share-based transactions and $26,000 of equity in net income of unconsolidated affiliate. An additional contribution to cash included reductions of $77,000 in prepaid expenses and other current assets, and an increase of $2.7 million in accounts payable. Such contributions were partially offset by increases of $4.0 million in accounts receivable, $2.1 million in inventory and decreases of $1.7 million in accrued liabilities. Our net cash provided by operating activities was $7.1 million in the three months ended September 27, 2014.

Our cash provided by investing activities of $8.6 million for the three months ended September 26, 2015 was the result of sales and maturities of available for sale investments exceeding purchases of available for sale investments by approximately $10.6 million, partially offset by additions to property and equipment of approximately $2.0 million. Our cash used in investing activities was $11.6 million for the three months ended September 27, 2014.

Our cash used in financing activities for the three months ended September 26, 2015 of $6.9 million was the result of expenditures of $5.8 million for the repurchase of our common stock, and $1.3 million of cash dividends paid, partially offset by $220,000 of excess tax benefit from share-based transactions. Our cash used in financing activities was $775,000 for the three months ended September 27, 2014.

A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of such businesses, products or technologies.

Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing efforts, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of our products. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all. We believe our current cash balances and cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures.

Contractual Obligations and Commitments

Our contractual obligations and commitments at September 26, 2015 are as follows:

Payments Due by Period
(in thousands) Less than 1 1– 3 3– 5
     Total      Year      Years      Years      Thereafter
Operating lease payments $      945 $      427 $      499 $      17 $      2
Capital equipment purchase obligations 11 11 - - -
Facility modifications 330 330 - - -
Total obligations $ 1,286 $ 768 $ 499 $ 17 $ 2

The operating lease commitments are primarily facility leases at our various Asian subsidiaries.

The facility modification commitments have been made by our Shandong, China manufacturing operation for a general contractor and architecture firm to develop feasibility studies, plans and cost estimates for potential additional development of our plant site. We have no other purchase obligations beyond routine purchase orders and the facility modifications shown in the table as of September 26, 2015.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, defined by Regulation S-K Item 303(a)(4).

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Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be reasonable given the circumstances. Actual results may vary from our estimates.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations, and require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition and accounts receivable allowances, which impact the recording of revenues; valuation of inventories, which impacts costs of goods sold and gross margins; accounting for income taxes, which impacts the income tax provision and net income; impairment of intangible assets and investments, which impacts the intangible asset and investment accounts; and share-based compensation, which impacts costs of goods sold and operating expenses.

For further information about the Company’s critical accounting policies, see the discussion of critical accounting policies in the Company’s Form 10-K for the fiscal year ended June 27, 2015. Management believes that there has been no significant change during the three month period ended September 26, 2015 to the items identified as critical accounting policies in the Company’s Form 10-K for the fiscal year ended June 27, 2015.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As of September 26, 2015 our investment portfolio consisted of investment-grade fixed income securities, excluding those classified as cash equivalents, of $79.0 million. These securities are subject to interest rate risk and will decline in value if market interest rates increase. However, we do not believe that such a decrease would have a material effect on our results of operations over the next fiscal year. Due to the short duration and conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.

When the general economy weakens significantly, the credit profile, financial strength and growth prospects of certain issuers of interest-bearing securities held in our investment portfolios may deteriorate, and our interest-bearing securities may lose value either temporarily or other than temporarily. We may implement investment strategies of different types with varying duration and risk/return trade-offs that do not perform well. As of September 26, 2015, we held a significant portion of our corporate cash in diversified portfolios of investment-grade marketable securities, mortgage- and asset-backed securities, and other securities that had unrealized gains net of tax of $125,000. Although we consider unrealized gains and losses on individual securities to be temporary, there is a risk that we may incur other-than-temporary impairment charges if credit and equity markets are unstable and adversely impact securities issuers.

We transact business in various non-U.S. currencies, primarily the New Taiwan Dollar, the Hong Kong Dollar and the Chinese Renminbi. We are exposed to fluctuations in foreign currency exchange rates on accounts receivable and accounts payable from sales and purchases in these foreign currencies and the net monetary assets and liabilities of our foreign subsidiaries. Of our $120.5 million of cash, cash equivalents and short-term investments as of September 26, 2015, $73.9 million is in our foreign subsidiaries. A hypothetical 10% favorable or unfavorable change in foreign currency exchange rates would have a material impact on our financial position and results of operations.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 26, 2015.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 26, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A: Risk Factors

This quarterly report on Form 10-Q contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statement as a result of various factors, including those set forth below. The listing below includes any material changes to and supersedes the description of the risk factors affecting our business previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 27, 2015.

RISKS RELATED TO THE MERGER

The Merger Agreement may be terminated in accordance with its terms and the Merger may not be consummated.

On September 2, 2015, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Diodes Incorporated, a Delaware Corporation (“Diodes”) and PSI Merger Sub, Inc., a California corporation and a wholly-owned subsidiary of Diodes (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly-owned subsidiary of Diodes. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, excluding shares owned by shareholders who have exercised dissenters’ rights under California law and shares owned by the Company, Diodes, Merger Sub or any of their respective subsidiaries, will be converted into the right to receive $17.00 in cash, without interest. The Merger Agreement contains a number of conditions that must be fulfilled to complete the Merger. Those conditions include, but are not limited to: the approval of the Merger by our shareholders; absence of any law enacted, issued, promulgated enforced or entered by any specified governmental entity of competent jurisdiction that is in effect and makes illegal, permanently enjoining or otherwise prohibiting the consummation of the merger; the continued accuracy of the representations and warranties of both parties subject to specified materiality standards; the performance by both parties of their covenants and agreements in all material respects; and that, since the date of the Merger Agreement, there has been no occurrence, effect, incident, action, failure to act or transaction that has had or would reasonably be expected to have, a material adverse effect on our company. These conditions to the closing of the Merger may not be fulfilled and, accordingly, the Merger may not be consummated. In addition, if the Merger is not completed by March 2, 2016, either we or Diodes may choose not to proceed with the Merger. In addition, we or Diodes may elect to terminate the Merger Agreement in certain other circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the closing of the Merger, whether before or after our shareholders approve the Merger. If the Merger Agreement is terminated under certain circumstances, we would be required to pay Diodes a termination fee equal to $15 million.

Failure to complete the Merger could negatively impact our stock price and our future business and financial results.

If the Merger is not consummated, our ongoing businesses may be materially and adversely affected and, without realizing any of the benefits of having completed the Merger, we will be subject to a number of risks, including the following:

matters relating to the Merger (including integration planning) have required and will continue to require substantial commitments of time and resources by our management, which could otherwise have been devoted to ongoing research and development activities, day-to-day operations and other opportunities that may have been beneficial to us as an independent company;

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we will be required to pay certain costs relating to the Merger, including legal, accounting, filing and other fees and mailing, financial printing and other expenses, whether or not the Merger is completed;

the current price of our common stock may reflect a market assumption that the Merger will occur, meaning that a failure to complete the Merger could result in a material decline in the price of our common stock;

we may experience negative reactions from investors, customers, regulators and employees;

the Merger Agreement places certain restrictions on the conduct of our business prior to the closing of the Merger. Such restrictions, the non-compliance of which is subject to the consent of Diodes, may prevent us from making certain acquisitions or taking certain other specified actions during the pendency of the Merger; and

any shareholder litigation in connection with the Merger or the Merger Agreement may result in significant costs of defense, indemnification and liability.

In addition to the above risks, we may be required to pay to Diodes a termination fee equal to $15 million, which may materially adversely affect our financial results. If the Merger is not consummated, these risks may materialize and may materially and adversely affect our business, financial results and share price.

The Merger Agreement contains provisions that restrict our ability to pursue or solicit alternatives to the Merger and for our board of directors to change its recommendation that our shareholders vote for the approval of the Merger and, in specified circumstances, could require us to pay Diodes a termination fee of $15 million. However, the Merger Agreement does not prevent our board of directors from considering and responding to unsolicited offers if the board of directors determines in good faith that the failure to do so would be inconsistent with its fiduciary duties.

Under the Merger Agreement, we are subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide information to, and enter into discussions or negotiations with, third parties regarding alternative acquisition proposals. However, prior to the receipt of the approval of the Merger from our shareholders, the solicitation restrictions are subject to a customary “fiduciary-out” provision that allow us, under certain circumstances, to provide information to and participate in negotiations or discussions with third parties with respect to an alternative acquisition proposal if our board of directors determines in good faith, after consultation with outside legal counsel, that the failure to take such action would reasonably be expected to be inconsistent with its fiduciary duties under applicable law. In addition, our board of directors, after satisfying certain notice requirements to Diodes, may change its recommendation with respect to the Merger if it determines in good faith, after consultation with outside legal counsel, that the failure to do so under certain circumstances specified in the Merger Agreement would reasonably be expected to be inconsistent with the board of directors’ fiduciary duties under applicable law.

Under certain circumstances, we may terminate the Merger Agreement in order to enter into an agreement with respect to a superior proposal, if our board of directors (after consultation with our outside legal counsel and our financial advisor) determines in good faith that such proposal is more favorable from a financial point of view to our shareholders (taking into account any revisions to the Merger Agreement agreed by Diodes within three business days of Diodes’ receipt of the terms of such proposal, or within two business days of Diodes’ receipt of any material amendment to such proposal) than the Merger. If our board of directors recommends such superior proposal to our shareholders but does not terminate the Merger Agreement, Diodes would be entitled to terminate the Merger Agreement. Under either of these circumstances, we would be required to pay Diodes a termination fee equal to $15 million. These provisions could discourage a third party that may have an interest in acquiring all or a significant part of us from considering or proposing that acquisition, or might result in a third party proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

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While the Merger is pending, we will be subject to business uncertainties that could adversely affect our business.

Uncertainty about the effect of the Merger on our employees, customers and suppliers may have an adverse effect on our company. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is consummated and for a period of time thereafter, and could cause customers, suppliers and others who deal with us to become uncertain about future business relationships with us that could possibly lead to reduced partnership and business momentum. Employee retention may be challenging during the pendency of the Merger, as certain of our employees may experience uncertainty about their future roles. If our key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the Company, our business could be seriously harmed. In addition, the Merger Agreement restricts us from taking specified actions until the Merger occurs without the consent of Diodes. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the consummation of the Merger.

Our directors and officers may have interests in the Merger different from the interests of our shareholders.

Certain of our directors and executive officers negotiated the terms of the Merger Agreement, and our board of directors approved the Merger Agreement and recommended that our shareholders vote in favor of the Merger. These directors and executive officers may have interests in the Merger that are different from, or in addition to, those of our shareholders generally. These interests include, but are not limited to, the treatment in the Merger of stock options, restricted stock units, change of control employment agreements and other rights held by our directors and executive officers, and provisions in the Merger Agreement regarding continued indemnification of and advancement of expenses to our directors and officers. Our shareholders should be aware of these interests when they consider our board of directors’ recommendation that they vote in favor of the Merger Proposal. In connection with the Merger, certain of our directors and executive officers, in their capacities as holders of shares or other equity interests of the Company entered into voting agreements pursuant to which they agreed, among other things, to vote or cause to be voted all of the Company shares beneficially owned by such shareholders for the approval of the Merger and the Merger Agreement and against any alternative proposal.

Our board of directors was aware of these interests when it determined that the Merger, on the terms and subject to the conditions set forth in the Merger Agreement, was fair to and in the best interests of the Company and its shareholder and approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.

Because the Merger Consideration to be paid to our shareholders is a fixed amount of cash per share of our common stock and does not include the issuance of any Diodes shares, our shareholders will not realize any potential future gains from the post-Merger combined business.

The amount of cash to be paid under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, including any potential long-term value of the successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock.

We will incur direct and indirect costs as a result of the Merger.

We will incur substantial expenses in connection with and as a result of completing the Merger and over a period of time following the consummation of the Merger. For the three months ended September 26, 2015, we have incurred direct transaction costs of approximately $1.7 million. While we have assumed that a certain level of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately.

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RISKS RELATED TO OUR BUSINESS AND OPERATING RESULTS

In the past, our operating results have varied significantly and are likely to fluctuate in the future, making it difficult to predict our future operating results.

We continue to face a challenging business environment and limited visibility on end-market demands. Wide varieties of factors affect our operating results, many of which are beyond our control. These factors and risks include, but are not limited to, the following:

changes in the quantity of our products sold;

changes in the average selling price of our products;

general conditions in the semiconductor industry;

changes in our product mix;

a change in the gross margins of our products;

the operating results of the FCP product line, which normally has a lower profit margin than IC products;

expenses incurred in obtaining, enforcing, and defending intellectual property rights;

the timing of new product introductions and announcements by us and by our competitors;

customer acceptance of new products introduced by us;

delay or decline in orders received from distributors;

growth or reduction in the size of the market for interface ICs;

the availability of manufacturing capacity with our wafer suppliers, especially to support sales growth and new products;

changes in manufacturing costs;

fluctuations in manufacturing yields;

disqualification by our customers for quality or performance related issues;

the ability of customers to pay us;

increased research and development expenses associated with new product introductions or process changes;

the impairment of our intangible assets or other long-lived assets; and

fluctuations in our effective tax rate from quarter to quarter.

All of these factors are difficult to forecast and could seriously harm our operating results. Our expense levels are based in part on our expectations regarding future sales and are largely fixed in the short term. Therefore, we may be unable to reduce our expenses fast enough to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to our expectations or any material delay of customer orders could harm our operating results. In addition, if our operating results in future quarters fall below public market analysts' and investors' expectations, the market price of our common stock would likely decrease.

The demand for our products depends on the growth of our end users' markets.

Our continued success depends in large part on the continued growth of markets for the products into which our semiconductor and frequency control products are incorporated. These markets include the following:

computers, notebooks, tablets and connectivity to related peripherals;

data communications and telecommunications equipment including switches and routers;

servers and storage equipment including cloud computing requirements;

consumer electronics equipment; and

embedded systems including video surveillance, medical and automotive.

Any decline in the demand for products in these markets could seriously harm our business, financial condition and operating results. These markets have also historically experienced significant fluctuations in demand, and over the past two years we’ve been impacted by declines in the markets for PC’s and notebook computers. We may also be seriously harmed by slower growth in the other markets in which we sell our products.

Customer demands for the Company’s products are volatile and difficult to predict.

Our business is characterized by short-term orders and shipment schedules. We do not have long-term purchase agreements with any of our customers. Customers can typically cancel or reschedule their orders without significant penalty. We typically plan production and inventory levels based on forecasts of customer demand generated with input from customers and sales representatives. Our customers continuously adjust their inventories in response to changes in end market demand for their products and the availability of semiconductor components. This results in frequent changes in demand for our products. Accordingly, we must rely on multiple assumptions to forecast customer demand. Various external factors that are outside of our control can make it difficult to accurately make such forecasts, and the volatility of customer demand limits our ability to predict future levels of sales and profitability.

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Further, as end customer demand can change very quickly, the supply of semiconductors can quickly and unexpectedly match or exceed demand. Also, semiconductor suppliers can rapidly increase production output. This can lead to a sudden oversupply situation and a subsequent reduction in order rates and revenues as customers adjust their inventories to true demand rates. A rapid and sudden decline in customer demand for our products can result in excess quantities of certain of our products relative to demand. Under such circumstances, we may be required to record significant provisions for excess and obsolete inventories. This could materially and adversely affect our results of operations and financial condition.

The markets for our products are characterized by rapidly changing technology, and our financial results could be harmed if we do not successfully develop and implement new manufacturing technologies or develop, introduce and sell new products.

The markets for our products are characterized by rapidly changing technology, frequent new product introductions and declining selling prices over product life cycles. We currently offer a comprehensive portfolio of silicon and quartz based products. Our future success depends upon the timely completion and introduction of new products, across all our product lines, at competitive price and performance levels. The success of new products depends on a variety of factors, including the following:

product performance and functionality;

customer acceptance;

competitive cost structure and pricing;

successful and timely completion of product development;

sufficient wafer fabrication capacity; and

achievement of acceptable manufacturing yields by our wafer suppliers.

Our failure to successfully develop new products that achieve market acceptance in a timely fashion and that can be efficiently and successfully integrated with our customers’ products could adversely affect our ability to grow our business and improve our operating results. The development, introduction and market acceptance of new products is critical to our ability to sustain and grow our business. Any failure to successfully develop, introduce, market and sell new products could materially adversely affect our business and operating results.

We may also experience delays, difficulty in procuring adequate fabrication capacity for the development and manufacture of new products, or other difficulties in achieving volume production of these products. Even relatively minor errors may significantly affect the development and manufacture of new products. If we fail to complete and introduce new products in a timely manner at competitive price and performance levels, our business would be significantly harmed.

If we do not develop products that our customers and end-users design into their products, or if their products do not sell successfully, our business and operating results would be harmed.

We have relied in the past and continue to rely upon our relationships with our customers and end-users for insights into product development strategies for emerging system requirements. We generally incorporate new products into a customer's or end-user's product or system at the design stage. Our success has been, and will continue to be, dependent upon manufacturers designing our connectivity products into their products. To achieve design wins, which are decisions by manufacturers to design our products into their systems, we must define and deliver cost effective and innovative connectivity solutions on a timely basis that satisfy the manufacturers’ requirements and specifications. Our ability to achieve design wins is subject to numerous risks including competitive pressures as well as technological risks and delays in our product development cycle. However, these design efforts, which can often require significant expenditures by us, may precede product sales, if any, by a year or more. With the increasing complexity of new generation products the development cost of each new product increases, making the selection process ever more critical with limited staff and financial resources. Moreover, the value to us of any design win will depend in large part on the ultimate success of the customer or end-user's product and on the extent to which the system's design accommodates components manufactured by our competitors. If we fail to achieve design wins or if the design wins fail to result in significant future revenues, our operating results would be harmed. If we have problems developing or maintaining our relationships with our customers and end-users, our ability to develop well-accepted new products may be impaired.

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Intense competition in the semiconductor industry may reduce the demand for our products or the prices of our products, which could reduce our revenues and gross profits and limit our ability to maintain or grow our business.

The semiconductor industry is intensely competitive, and we expect competition in this industry to continue to increase. This competition has resulted in rapid technological change, evolving standards, reductions in product selling prices and rapid product obsolescence leading to excess and obsolete inventory writedowns (for further detail, see Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies – Inventories). If we are unable to successfully meet these competitive challenges, we may be unable to maintain and grow our business. Any inability on our part to compete successfully would also adversely affect our results of operations and impair our financial condition.

Our competitors include Analog Devices, Avago Technologies, Cypress Semiconductor, Fairchild Semiconductor, Hitachi, Integrated Device Technology, Maxim Integrated Products, Motorola, On Semiconductor, NXP, Parade Technologies, Silicon Laboratories, STMicroelectronics, Texas Instruments, and Toshiba. Most of those competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing customer relationships than we do. We also compete with other major or emerging companies that sell products to certain segments of our markets. Competitors with greater financial resources or broader product lines may have a greater ability to sustain price reductions in our primary markets in order to gain or maintain market share.

We believe that our future success will depend on our ability to continue to improve and develop our products and processes. Unlike us, many of our competitors maintain internal manufacturing capacity for the fabrication and assembly of semiconductor products. This ability may provide them with more reliable manufacturing capability, shorter development and manufacturing cycles and time-to-market advantages. In addition, competitors with their own wafer fabrication facilities that are capable of producing products with the same design geometries as ours may be able to manufacture and sell competitive products at lower prices. Any introduction of products by our competitors that are manufactured with improved process technology could seriously harm our business. As is typical in the semiconductor industry, our competitors have developed and marketed products that function similarly or identically to ours. If our products do not achieve performance, price, size or other advantages over products offered by our competitors, we might lose market share. Competitive pressures could also reduce market acceptance of our products, reduce our prices and increase our expenses.

We also face competition from the makers of ASICs and other system devices. These devices may include interface logic functions that may eliminate the need or sharply reduce the demand for our products in particular applications.

Downturns in the semiconductor industry, rapidly changing technology, accelerated selling price erosion and evolving industry standards can harm our operating results.

The semiconductor industry has historically been cyclical and periodically subject to significant economic downturns, characterized by diminished product demand, accelerated erosion of selling prices, overcapacity and excess and obsolete inventory as well as rapidly changing technology and evolving industry standards. In the future, we may experience substantial period-to-period fluctuations in our business and operating results due to general semiconductor industry conditions, overall economic conditions or other factors. Our business is also subject to the risks associated with the effects of legislation and regulations relating to the import or export of semiconductor products.

Past domestic and worldwide economic conditions adversely affected us, and future economic conditions could have adverse effects on our business, results of operations, financial condition and cash flows.

Our revenues and earnings have fluctuated significantly in the past and may fluctuate significantly in the future. General economic or other conditions could cause a downturn in the market for our products or technology. In the past, financial disruptions affecting the banking system, investment banks, insurance companies and the financial markets negatively impacted general domestic and global economic conditions. These economic conditions have resulted in our facing very challenging periods leading to reduced sales and earnings.

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Our sales have been adversely impacted due to continued economic softness in many parts of the world and only tepid growth in others. There could be a number of effects on our business that could also adversely affect our operating results. Disruptions may result in the insolvency of key suppliers resulting in product delays; the inability of our customers to obtain credit to finance purchases of our products and/or customer insolvencies that cause our customers to change delivery schedules, cancel or reduce orders; a slowdown in global economies which could result in lower end-user demand for our products; and increased impairments of our investments. Net income could vary from expectations depending on the gains or losses realized on the sale or exchange of securities, gains or losses from equity method investments, and impairment charges related to intangible assets, long-term assets, investments and marketable securities. Our cash and marketable securities investments represent significant assets that may be subject to fluctuating or even negative returns depending upon interest rate movements and financial market conditions in fixed income securities.

Volatility in the financial markets and overall economic uncertainty increases the risk of substantial quarterly and annual fluctuations in our earnings. Given the current economic environment, we remain cautious and we expect our customers to be cautious as well, which could affect our future results. If the economic recovery slows down or dissipates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

The complexity of our products makes us susceptible to manufacturing problems, which could increase our costs and delay our product shipments.

The manufacture and assembly of our products is highly complex and sensitive to a wide variety of factors, including:

the level of contaminants in the manufacturing environment;

impurities in the materials used; and

the performance of manufacturing personnel and production equipment.

In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are cut into individual die. These die are assembled into individual packages and tested for performance. Our wafer fabrication suppliers have from time to time experienced lower than anticipated yields of suitable die. In the event of such decreased yields, we would incur additional costs to sort wafers, an increase in average cost per usable die and an increase in the time to market or availability of our products. These conditions could reduce our net revenues and gross margin and harm our customer relations.

We rely on independent manufacturers who may not be able to meet our manufacturing requirements.

We do not manufacture any of our IC products. Therefore, we are referred to in the semiconductor industry as a "fabless" producer. We depend upon third party foundries to produce wafers and subcontractors to manufacture IC products that meet our specifications. We currently have third party manufacturers located in China, Taiwan, Singapore, Malaysia, India, Korea and Japan that can produce products that meet our needs. However, as the industry continues to progress to smaller manufacturing and design geometries, the complexities of producing semiconductors will increase. Decreasing geometries may introduce new problems and delays that may affect product development and deliveries. Due to the nature of the industry and our status as a "fabless" IC semiconductor company, we could encounter fabrication-related problems that may affect the availability of our products, delay our shipments or increase our costs.

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Our contracts with our wafer suppliers do not obligate them to a minimum supply or set prices. Any inability or unwillingness of our wafer suppliers generally, and GlobalFoundries, TSMC and MagnaChip in particular, to meet our manufacturing requirements would delay our production and product shipments and harm our business.

In recent years, we purchased over 70% of our wafers from MagnaChip, TSMC and GlobalFoundries, with the balance from other wafer suppliers. Our reliance on independent wafer suppliers to fabricate our wafers at their production facilities subjects us to possible risks such as:

lack of adequate capacity or assured product supply;

lack of available manufactured products;

reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;

unanticipated changes in wafer prices; and

closure of production facilities.

Any inability or unwillingness of our wafer suppliers to provide adequate quantities of finished wafers to meet our needs in a timely manner would delay our production and product shipments and seriously harm our business. In the past, a wafer supplier shut down one of their production facilities used to manufacture our products. We transitioned the production of these products to different facilities. The transfer of production to other facilities subjects us to the above listed risks as well as potential yield or other production problems, which could arise as a result of any change.

At present, we purchase wafers from our suppliers through the issuance of purchase orders based on our rolling nine-month forecasts. The purchase orders are subject to acceptance by each wafer supplier. We do not have long-term supply contracts that obligate our suppliers to a minimum supply or set prices. We also depend upon our wafer suppliers to participate in process improvement efforts, such as the transition to finer geometries. If our suppliers are unable or unwilling to do so, our development and introduction of new products could be delayed. Furthermore, sudden shortages of raw materials or production capacity constraints can lead wafer suppliers to allocate available capacity to customers other than us or for their internal uses, interrupting our ability to meet our product delivery obligations. Any significant interruption in our wafer supply would seriously harm our operating results and our customer relations. Our reliance on independent wafer suppliers may also lengthen the development cycle for our products, providing time-to-market advantages to our competitors that have in-house fabrication capacity.

In the event that our suppliers are unable or unwilling to manufacture our key products in required volumes, we will have to identify and qualify additional wafer foundries. The qualification process can take up to nine months or longer. Furthermore, we are unable to predict whether additional wafer foundries will become available to us or will be in a position to satisfy any of our requirements on a timely basis, or at all.

In the quarter ended December 27, 2014, we were notified by MagnaChip that they will close a production facility, from which we purchase wafers that support approximately 15% of our revenues, by December 2015. We are working with MagnaChip to transfer production of these wafers to one of their alternate facilities. We have successfully conducted fab transfers in the past, but we may suffer some disruption in supply that could reduce our future revenues.

We depend on single or limited source assembly subcontractors with whom we do not have written contracts. Any inability or unwillingness of our assembly subcontractors to meet our assembly requirements would delay our product shipments and harm our business.

We primarily rely on foreign subcontractors for the assembly and packaging of our products and, to a lesser extent, for the testing of finished products. Some of these subcontractors are our single source supplier for some of our packages. In addition, changes in our or a subcontractor's business could cause us to become materially dependent on a single subcontractor. We have from time to time experienced difficulties in the timeliness and quality of product deliveries from our subcontractors and may experience similar or more severe difficulties in the future. We generally purchase these single or limited source components or services pursuant to purchase orders and have no guaranteed arrangements with these subcontractors. These subcontractors could cease to meet our requirements for components or services, or there could be a significant disruption in supplies from them, or degradation in the quality of components or services supplied by them. Any circumstance that would require us to qualify alternative supply sources could delay shipments, result in the loss of customers and limit or reduce our revenues. Introducing new products or transferring existing products to a new third party manufacturer or process may result in unforeseen product specification and operating problems. These problems may affect our shipments and may be costly to correct.

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We may experience integration or other problems with potential future acquisitions, which could have an adverse effect on our business or results of operations. New acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

Our previous and potential future acquisitions could result in the following:

large one-time write-offs;

the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner;

the challenges in achieving strategic objectives, cost savings, and other benefits from acquisitions as anticipated;

the risk of diverting the attention of senior management from other business concerns;

risks of entering geographic and business markets in which we have no or limited prior experience and potential loss of key employees of acquired organizations;

the risk that our markets do not evolve as anticipated and that the technologies and capabilities acquired do not prove to be those needed to be successful in those markets;

potentially dilutive issuances of equity securities;

excessive usages of cash;

the incurrence of debt and contingent liabilities or amortization expenses related to intangible assets;

difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies; and

difficulties in integrating or expanding information technology systems and other financial or business processes that may lead to financial reporting issues.

As part of our business strategy, we may seek acquisition prospects that would complement our existing product offerings, improve our market coverage or enhance our technological capabilities. In addition, from time to time, we invest in other companies, without actually acquiring them, and such investments involve many of the same risks as are involved with acquisitions.

Implementation of new Financial Accounting Standards Board (“FASB”) rules and the issuance of new corporate governance regulations or other accounting regulations, or reinterpretation of existing laws or regulations, could materially impact our business or stated results.

In general, from time to time the government, courts and the financial accounting boards may issue new corporate governance regulations or accounting regulations, or modify or reinterpret existing ones. There may be future changes in laws, interpretations or regulations that would affect our financial results or the way in which we present them. Additionally, changes in the laws or regulations could have adverse effects on hiring and many other aspects of our business that would affect our ability to compete, both nationally and internationally.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the SEC to establish new disclosure and reporting requirements for those companies who use “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in their products, whether or not these products are manufactured by third parties. We filed our latest report with the SEC in May 2015 for the calendar year ended December 31, 2014. There will be future costs associated with complying with the disclosure requirements, including for due diligence in regard to the sources of any conflict minerals used in our products and, beginning with the report for calendar year 2015, an audit report of our Conflict Minerals Report prepared by an independent private sector auditor. In addition, depending on the outcome of such verification activities, there may be costs of remediation and other changes to products, processes, or sources of supply.

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If we are unable to maintain processes and procedures to sustain effective internal control over our financial reporting, our ability to provide reliable and timely financial reports could be harmed and this could have a material adverse effect on our stock price.

Under the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, we are required to maintain, and evaluate the effectiveness of, our internal control over financial reporting and disclosure controls and procedures. In our annual reports on Form 10-K for the years ended July 3, 2010, June 27, 2009, June 30, 2007 and July 2, 2005, we reported material weaknesses in our internal control over financial reporting. We have since remediated these deficiencies and continue to spend a significant amount of time and resources to ensure compliance with Section 404 of the Sarbanes Oxley Act of 2002. As reported in Item 9A of this Form 10-K, our management does not believe that we had any material weaknesses in our internal control over financial reporting as of June 27, 2015, and management has determined that as of June 27, 2015, our internal control over financial reporting was effective. However, we have and will continue to evolve our business in a changing marketplace. In addition, we are expanding our overseas operations, and as we grow in these locations, we may have difficulty in recruiting and retaining a complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of U.S. generally accepted accounting principles commensurate with our financial reporting requirements. Due to these factors, there can be no assurance that other material weaknesses or significant deficiencies will not arise in the future. Should we or our independent registered public accounting firm determine in future periods that we have a material weakness in our internal control over financial reporting, the reliability of our financial reports may be impacted, and investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and we could suffer other materially adverse consequences.

Changes to environmental laws and regulations applicable to manufacturers of electrical and electronic equipment are causing us to redesign our products, and may increase our costs and expose us to liability.

The implementation of new environmental regulatory legal requirements, such as lead free initiatives, may affect our product designs and manufacturing processes. The impact of such regulations on our product designs and manufacturing processes could affect the timing of compliant product introductions as well as their commercial success. Redesigning our products to comply with new regulations may result in increased research and development and manufacturing and quality control costs. In addition, the products we manufacture that comply with new regulatory standards may not perform as well as our current products. Moreover, if we are unable to successfully and timely redesign existing products and introduce new products that meet new standards set by environmental regulation and our customers, sales of our products could decline, which could materially adversely affect our business, financial condition and results of operations.

We compete with others to attract and retain key personnel, and any loss of or inability to attract key personnel would harm us.

To a greater degree than non-technology companies, our future success will depend on the continued contributions of our executive officers and other key management and technical personnel. None of these individuals has an employment agreement with us and each one would be difficult to replace. We do not maintain any key person life insurance policies on any of these individuals. The loss of the services of one or more of our executive officers or key personnel or the inability to continue to attract qualified personnel could delay product development cycles or otherwise harm our business, financial condition and results of operations.

Our future success also will depend on our ability to attract and retain qualified technical, sales, marketing, finance and management personnel, particularly highly skilled design, process and test engineers, for whom competition can be intense. During strong business cycles, we expect to experience difficulty in filling our needs for qualified engineers and other personnel. If we do not succeed in hiring and retaining candidates with appropriate qualifications, our revenues, operations and product development efforts could be harmed.

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Our limited ability to protect our intellectual property and proprietary rights could harm our competitive position. Litigation regarding intellectual property could divert management attention, be costly to defend and prevent us from using or selling the challenged technology.

Our success depends in part on our ability to obtain patents and licenses and preserve other intellectual property rights covering our products and development and testing tools. In the United States, we currently hold 96 patents covering certain aspects of our product designs and have five additional patent applications pending. Copyrights, mask work protection, trade secrets and confidential technological know-how are also key to our business. Additional patents may not be issued to us or our patents or other intellectual property may not provide meaningful protection. We may be subject to, or initiate, interference proceedings in the U.S. Patent and Trademark Office. These proceedings can consume significant financial and management resources. We may become involved in litigation relating to alleged infringement by us of others' patents or other intellectual property rights. This type of litigation is frequently expensive to both the winning party and the losing party and takes up significant amounts of management's time and attention. In addition, if we lose such a lawsuit, a court could require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other reasons, this type of litigation could seriously harm our business. Also, although we may seek to obtain a license under a third party's intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all.

Because it is important to our success that we are able to prevent competitors from copying our innovations, we intend to continue to seek patent, trade secret and mask work protection for our technologies. The process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology or design around the patents we own.

We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements. In addition, the laws of some territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

Our independent foundries use a process technology that may include technology we helped develop with them, and that may generally be used by those foundries to produce their own products or to manufacture products for other companies, including our competitors. In addition, we may not have the right to implement key process technologies used to manufacture some of our products with foundries other than our present foundries.

We may not provide adequate allowances for exchanges, returns and concessions.

We recognize revenue from the sale of products when shipped, less an allowance based on future authorized and historical patterns of returns, price protection, exchanges and other concessions. We believe our methodology and approach are appropriate. However, if the actual amounts we incur exceed the allowances, it could decrease our revenue and corresponding gross profit.

Our future tax rates and tax payments could be higher than we anticipate and may harm our results of operations.

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. A number of factors, including unanticipated changes in the mix of earnings in countries with differing statutory tax rates or by unexpected changes in existing tax laws or our interpretation of them, could unfavorably affect our future effective tax rate. In the event our management determines it is no longer more likely than not that we will realize a portion of our deferred tax assets we will be required to increase our valuation allowance which will result in an increase in our effective tax rate. Furthermore, our tax returns are subject to examination in all the jurisdictions in which we operate which subjects us to potential increases in our tax liabilities.

If our liability for U.S. and foreign taxes is greater than we have anticipated and reserved for, our operating results may suffer.

We are subject to taxation in the United States and in foreign jurisdictions in which we do business, including China. We believe that we have adequately estimated and reserved for our income tax liability. However, our effective tax rates may not be as low as we anticipate. As of June 27, 2015, one of the Company’s subsidiaries in a foreign tax jurisdiction is under audit for the years 2010 to 2013. Our business operations, including our transfer pricing for transactions among our various business entities operating in different tax jurisdictions, may be audited at any time by the U.S., Chinese or other foreign tax authorities.

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A number of factors may adversely impact our future effective tax rates, such as:

changes in the tax laws of any of the countries in which we pay substantial taxes, including changes to tax rates or to transfer pricing standards, or more fundamental changes such as the various proposals that exist from time to time for U.S. international tax reform;

challenges to our transfer pricing methodologies;

changes in the valuation of our deferred tax assets and liabilities;

changes in U.S. general accepted accounting principles; and

the repatriation of non-U.S. earnings with respect to which we have not previously provided for U.S. taxes.

A change in our effective tax rate due to any of these factors may adversely impact our future results from operations. Also, changes in tax laws could have a material adverse effect on our ability to utilize cash in a tax efficient manner.

A large portion of our revenues is derived from sales to a few key customers, and the loss of one or more of our key customers, or their key end user customers, could significantly reduce our revenues. In addition, our sales through distributor channels increases the complexity of our business.

A relatively small number of key customers have accounted for a significant portion of our net revenues in each of the past several fiscal years. In general we expect this to continue for the foreseeable future. We had two direct customers who each accounted for more than 10% of net revenues during the three months ended September 26, 2015 and September 27, 2014. As a percentage of net revenues, sales to our top five direct customers during the three months ended September 26, 2015 and September 27, 2014 totaled 52% in both periods.

We do not have long-term sales agreements with any of our customers. Our customers are not subject to minimum purchase requirements, may reduce or delay orders periodically due to excess inventory and may discontinue purchasing our products at any time. Our distributors typically offer competing products in addition to ours. For the three months ended September 26, 2015 and September 27, 2014, sales to our domestic and international distributors were approximately 65% and 66% of net revenues, respectively. Distributors therefore continue to account for a significant portion of our sales. The loss of one or more significant customers, or the decision by a significant distributor to carry additional product lines of our competitors could decrease our revenues.

Selling through distributor channels increases the complexity of our business, requiring us to, among other matters:

manage a more complex supply chain;

monitor and understand the drivers of inventory levels at each of our distributors;

provide for credits, return rights and price protection;

estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and

monitor the financial condition and creditworthiness of our distributors.

Increases in inventory could increase the complexity of one or more of the above factors. Any failure to manage these challenges, or the occurrence of an imbalance in supply and demand, could cause us or our distributors to inaccurately forecast sales and carry excess or insufficient inventory, thereby adversely affecting our net sales, operating results and cash flows. For further detail on credits, return rights and price protection, see Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies – Revenue Recognition.

Because we sell products in foreign markets and have operations outside of the United States, we face foreign business, political, economic and currency risks that could seriously harm us. Almost all of our wafer suppliers and assembly subcontractors are located in Southeast Asia, as are our FCP manufacturing facilities, which exposes us to the problems associated with international operations.

Risks associated with international business operations include the following:

disruptions or delays in shipments;

changes in economic conditions in the countries where these subcontractors are located;

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currency fluctuations;

changes in political conditions;

potentially reduced protection for intellectual property;

foreign governmental regulatory requirements and unexpected changes in them;

the burdens of complying with a variety of foreign laws;

import and export controls;

delays resulting from difficulty in obtaining export licenses for technology;

changes in tax laws, tariffs and other barriers, and freight rates; and

compliance with Generally Accepted Accounting Principles in the United States (“U. S. GAAP”).

Regulatory, geopolitical and other factors could seriously harm our business or require us to modify our current business practices. We are subject to general geopolitical risks in connection with our international operations, such as political and economic instability and changes in diplomatic and trade relationships. Although most of our products are sold in U.S. dollars, we incur a significant amount of certain types of expenses, such as payroll, utilities, capital equipment purchases and taxes in local currencies. The impact of currency exchange rate movements could harm our results and financial condition. In addition, changes in tariff and import regulations and in U.S. and non-U.S. monetary policies could harm our results and financial condition by increasing our expenses and reducing our revenue. Varying tax rates in different jurisdictions could harm our results of operations and financial condition by increasing our overall tax rate.

In the three months ended September 26, 2015, we generated approximately 93%, 4% and 3% of our net revenues from sales in Asia, the United States and the rest of the world, respectively. In the three months ended September 27, 2014, we generated approximately 91%, 6% and 3% of our net revenues from sales in Asia, the United States and the rest of the world, respectively. We expect that foreign sales will continue to represent by far the majority of net revenues. This will require significant management attention and financial resources and further subject us to international operating risks.

We have subsidiaries located in Asia. We manufacture some of our FCPs in Taiwan as well as in the Jinan Development Zone in the Shandong Province of the PRC. The development of the Jinan facility depended upon various tax concessions, tax rebates and other support from the local governmental entity. There can be no assurance that the local governmental entity will not change their position regarding such tax and other support and such a change might adversely affect the profitability of this facility. In addition, there can be no assurance we will be able to assemble and maintain sufficient management resources in our Asia subsidiaries, including a sales force knowledgeable about our target markets and an accounting staff with sufficient U. S. GAAP accounting expertise.

We are expanding our presence in China with manufacturing and research and development activities. We will be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse effect on our business, financial condition and operating results. The value of the Chinese yuan against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. Significant future appreciation of the yuan could increase our component and other raw material costs as well as our labor costs, and could adversely affect our financial results. Devaluation of the yuan could lower some of our costs and make our operations more competitive, but would also reduce the value of sales made in the currency. To the extent that we need to convert United States dollars into yuan for our operations, appreciation of yuan against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our yuan into United States dollars for other business purposes and the United States dollar appreciates against the yuan, the United States dollar equivalent of the yuan we convert would be reduced. The Chinese government now measures the exchange rate of the yuan against a number of currencies, rather than just the United States dollar. Fluctuations in the yuan exchange rate could increase and could adversely affect our ability to operate our business.

In addition, there is a potential risk of conflict and further instability in the relationship between Taiwan and the PRC. Conflict or instability could disrupt the operations of one of our principal wafer suppliers, several of our assembly subcontractors located in Taiwan, and our FCP manufacturing operations in Taiwan and the PRC.

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Our operations and financial results could be severely harmed by natural disasters.

Our headquarters and some of our major suppliers' manufacturing facilities are located near major earthquake faults. In particular, our Asian operations and most of our third party service providers involved in the manufacturing of our products are located within relative close proximity. Therefore, any disaster that strikes within or close to that geographic area could be extremely disruptive to our business and could materially and adversely affect our operating results and financial condition.

One of the foundries we use is located in Taiwan, which has suffered severe earthquakes in the past. Taiwan is also exposed to typhoons and tsunamis, which can affect not only foundries we rely upon but also our PSE-TW subsidiary. In March 2011, an earthquake and tsunami occurred off the northeast coast of Japan which disrupted the global supply chain for core materials manufactured in Japan that are incorporated in our products and manufacturing equipment. Thailand experienced floods in the quarter ended December 31, 2011, which interrupted the industry’s supply chain for storage products and impacted our sales as well. If a major earthquake, typhoon, tsunami or other natural disaster were to affect our operations or those of our suppliers, our product supply could be interrupted, which would seriously harm our business. Natural disasters could also affect the operations of the distributors and contract manufacturers we sell to, as well as the operations of our end use customers, which would adversely affect our operations and financial results. Natural disasters anywhere in the world may potentially adversely affect us by harming or causing interruptions to our supply chain or the supply chains of our suppliers, direct customers or end use customers.

System security risks, data protection or privacy breaches and cyber-attacks could disrupt our internal operations and harm the reputation of the Company.

Breaches of our information technology systems caused by computer viruses, unauthorized access, sabotage, vandalism or terrorism could compromise our information technology networks and result in unauthorized release of our, our customers’ or our suppliers’ confidential or proprietary information, theft of our intellectual property, cause a disruption to our manufacturing and other operations, result in release of employee personal data, or cause us to incur increased information technology protection costs, any of which could adversely affect our financial results, stock price and reputation.

RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK

Our stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control.

The trading price of our common stock has been, and is likely to continue to be, highly volatile. The securities markets have experienced significant price and volume fluctuations in the past, and the market prices of the securities of semiconductor companies have been especially volatile. This market volatility, as well as general economic, market or political conditions, including the current global economic situation, could reduce the market price of our common stock in spite of our operating performance. Our stock price could fluctuate widely in response to factors some of which are not within our control, including:

general conditions in the semiconductor and electronic systems industries;

actual or anticipated fluctuations in our operating results;

changes in expectations as to our future financial performance;

announcements of technological innovations or new products by us or our competitors;

changes in earnings estimates by analysts; and

price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many high technology companies.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 24, 2014, the Board authorized a share repurchase program for $20 million of our common stock. We were authorized to repurchase the shares from time to time in the open market or private transactions, at the discretion of our management. The following table summarizes the stock repurchase activity during the three months ended September 26, 2015.

Total Number of
Total Shares Purchased Maximum $ Value
Number of Average as Part of Publicly That May Yet be
Shares Price Paid Announced Plans Purchased Under the
Period       Purchased       per Share       or Programs       Plans or Programs
July, 2015 224,906 $ 12.37 224,906 $ 12,965,753
August, 2015 240,051 12.42 240,051 9,984,343
September, 2015 - - - 9,984,343
Total 464,957 $ 12.39 464,957 $ 9,984,343

Current cash balances and the proceeds from stock option exercises and purchases in the stock purchase plan have funded stock repurchases in the past, and we expect to fund future stock repurchases from these same sources.

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Item 6. Exhibits.

Exhibit   Exhibit
Number       Description  
2.1*

Agreement and Plan of Merger, dated as of September 2, 2015, by and among Pericom Semiconductor Corporation, PSI Merger Sub, Inc., and Diodes Incorporated, filed as Exhibit 10.2 to the Company’s Form 8-K filed September 3, 2015, and incorporated herein by reference.

3.1

Amended and Restated Bylaws, as amended on September 2, 2015, filed as Exhibit 10.2 to the Company’s Form 8-K filed September 3, 2015, and incorporated herein by reference.

31.1

Certification of Alex C. Hui, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Kevin S. Bauer, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Alex C. Hui, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Kevin S. Bauer, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1

Form of Voting Agreement, dated as of September 2, 2015, by and among Diodes Incorporated and certain holders of shares and other equity interests of Pericom Semiconductor Corporation, filed as Exhibit 10.2 to the Company’s Form 8-K filed September 3, 2015, and incorporated herein by reference.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*

Certain schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC. Pericom agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Pericom Semiconductor Corporation
(Registrant)

Date:     November 2, 2015        By:  /s/ Alex C. Hui
Alex C. Hui
Chief Executive Officer
 
By: /s/ Kevin S. Bauer
  Kevin S. Bauer
Chief Financial Officer

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